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Stochastics for the worst case: distributions and risk measures for minimal returns

Author

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  • Mihnea-Stefan Mihai

    (University of Saarland)

Abstract

Distributions for returns are used to compute the capital charge for portfolios in investment banks. The mainstream definition of returns is based on closing prices and neglects the important effects of intraday trading activity on the losses . In this paper we introduce ''minimal returns'', a definition of returns that accounts for intraday trading and gives a worst-case approach on losses. We suggest an appropriate distribution for minimal returns that can be used to compute Value at Risk and coherent risk measures, as suggested by Artzner et al. (1997).

Suggested Citation

  • Mihnea-Stefan Mihai, 2003. "Stochastics for the worst case: distributions and risk measures for minimal returns," Risk and Insurance 0305001, EconWPA.
  • Handle: RePEc:wpa:wuwpri:0305001
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    File URL: http://econwpa.repec.org/eps/ri/papers/0305/0305001.pdf
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    References listed on IDEAS

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    1. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    2. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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    Cited by:

    1. Carlos Arriaga & Luis Miranda, 2009. "Risk and Efficiency in Credit Concession: A Case Study in Portugal," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(3), pages 307-326.

    More about this item

    Keywords

    Risk measures ; Value at Risk ; Stock Returns ; Binomial Tree ; Brownian Motion ; Capital Charge ; Risk Management ; Worst Case Analysis ; Binomial Tree Extremes;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • G1 - Financial Economics - - General Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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